Check out the latest Netflix earnings call transcript.
After hiking its prices in many of its markets in 2017, Netflix (NFLX +0.13%) is already increasing its prices again. Given how well the price increase went for the streaming-TV giant last time, investors unsurprisingly love the news. Shares are rising on Tuesday, up nearly 6% as of 10:30 a.m. EST.
The willingness to roll out another price increase not long after its increase in 2017 reflects management's confidence in its pricing power. Pricing power, of course, is an invaluable asset for Netflix as the company aims to keep spending aggressively on content while growing revenue and operating profits.
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Hiking prices
Netflix is boosting its prices in the U.S. by 13% to 18%, depending on the subscription plan. Effective immediately for new subscribers, Netflix's basic plan, which allows users to stream videos on only one screen at a time and at lower resolution, now costs $9 -- up from $8. The company's standard plan, which gives subscribers HD viewing on up to two screens, now costs $13 -- up from $11. Finally, Netflix increased the price of its premium plan, which includes ultra HD and viewing on up to four screens, from $14 to $16.
For existing subscribers, these prices will roll out over the next three months, according to the Associated Press.
As these price increases take place in the U.S., they will likely have a significant impact on Netflix's business. While the company's international streaming revenue surpassed that of the U.S. segment for the first time last year, the U.S. market is still more lucrative for the company. In the company's third quarter of 2018, for instance, U.S. contribution profit (revenue less cost of revenue and marketing expenses) was $762 million while international contribution profit was $338 million.
Key to Netflix's strong growth
Highlighting Netflix's pricing power, CEO Reed Hastings noted in the company's fourth-quarter 2017 earnings call that its price increases had "very little effect on signups and growth" and, in fact, helped drive "really strong results." Furthermore, Netflix added more subscribers in 2018 than it did in 2017 despite having higher average subscription prices in 2018 than in 2017.
Just as important, Netflix's price increases are helping the company offer more value to its customers. "[O]ur responsibility is then to take that increased revenue and turn that into even better content," Hastings explained in the company's fourth-quarter 2017 earnings call. "That's the fundamental deal, and consumers are tolerant as long as something's improving. So, what we have to do is push ourselves to just keep doing more incredible content ..."
A price increase in Netflix's most lucrative market comes as the company expects content costs to weigh on earnings per share. Management guided for fourth-quarter earnings per share of $0.23 -- down from $0.29 in the year-ago quarter. Higher prices could help Netflix grow earnings per share in 2019 even as the company spends aggressively on content.
